Back on Oct. 23, online music purveyor Pandora (P) entered its earnings confessional. The mixed report appears to have been anything but music to the ears of Pandora stock investors as P stock cratered 35% the next session. And now, a month later, Pandora stock is still somewhat of a short.
To be fair, despite Pandora stock’s price performance, the report wasn’t all bad news.
For one, Pandora did manage to top Street earnings views with a loss of just two cents per share compared to estimates of a four-cent loss. But a headline and much larger 40-cent loss attributed to a one-time royalty settlement of $90 million for pre-1972 recordings may have taken the spotlight.
Officially, Pandora did miss on the revenue side. However, improving 30% year-over-year growth on sales of $311.6 million compared to analysts’ forecasts of $312 million hardly seems like dire straits for Pandora stock.
On the other hand, and probably most important to investors, slower-than-expected subscriber growth — affected by Apple’s (AAPL) new and competing Apple Music service — and Pandora’s reduced sales guidance, were two factors not so easily brushed aside.
Pandora Stock Monthly Chart
The monthly chart of Pandora stock shows price action which is steeped in a downtrend. Further, shares of Pandora appear to be closing in on a test of P stock’s all-time-lows set back in late 2013. Put the two together and the situation certainly seems bearish for P stock.
At the same time, there is some evidence Pandora stock may not make it easy for bears. Pragmatically, traders should appreciate that the current Pandora stock price of $13 is still a 45% tumble away from lows in P stock near $7. That’s a lot of ground to cover — and remember, all trends do eventually end.
There is also some evidence that Pandora stock’s current downtrend could be bottoming right now. A two-step or mirror move shows leg AB = CD has completed near $11.50 with last month’s price crash in Pandora stock.
The price chart of P stock also shows the low of the past month matches or lines up nicely inside the stock’s prior congestion area as Pandora stock bottomed before exploding higher. As such, this area could represent technical support from buyers of Pandora stock anticipating a second bottom to hold.
All things considered, I’m somewhat bearish on Pandora stock and see it drifting a bit lower. But with less conviction as to how low P stock might go, I don’t want to sink a lot of coin into a strategy or be caught short stock with open-ended risk in the event bears are overstaying their welcome.
Pandora Stock Bearish Long Put Butterfly
Reviewing the Pandora stock options board, one strategy that looks attractive based on our modestly bearish outlook for Pandora stock is the December $13/$11/$9 put butterfly for a debit of 45 cents or less.
For traders new to butterflies, the strategy can be broken down into a bearish long put vertical using the Pandora December $13 and $11 put strikes and having a second, contrasting bullish December $11 / $9 put strike vertical.
The two spreads’ profit maximization converges at $11 in Pandora stock. This amount is the distance in strike price of one spread minus the debit or $1.55. As shares of Pandora move either up or down and away from $11, the trader makes less profit and eventually has a capped loss of 45 cents above $13 or below $9.
To be sure, you don’t have to put a lot of coin into Pandora stock to play this strategy, and it does maintain a nice-sized profit range from $9.45 to $12.55. The downside of this or any long butterfly spread is that the position won’t deliver profits approaching the maximum until expiration as the countering verticals make incremental and interim profits slow to be realized.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT